Considering buying an 18 Unit Rental Property on 5 Acres

[Stephen Blair]

Hello from Arkansas. Love the forum here and the information. 

My wife and I are considering buying an 18 unit rental property on 5 acres. The units are all in good shape and need nothing at the moment. Currently rented below market value, no automation, all manual pen and paper checks or cash and the owner self manages. Tired older owners that want to sell, I know the owners well. It's three 4 plex's, one duplex, small single bedroom home, small two bedroom home, and large owners current home with small apartment attached. Good location in a good rural area close to a military installation and only two miles from my home.Two vacancys now but he doesn't really advertise at all. I think these could be filled easily. His home would also be up for rent once the property was purchased and he moves out.

Listed for $1.75m but offered to me for $1.5 with owner financing and $350K down at a 7% rate for 40 years. I am trying to negotiate at 6% and my numbers below are based off that. I would put up 200K out of pocket for the down payment and use a HELOC for the other 150K which we would pay down as fast as possible probably within the first 5 years before the repayment period starts. Rentals are currently bringing in $11,000 month. That would go up to $14,000 once the owners home was rented and the two vanancies filled. Within two years I believe the rents could easily be raised to bring in $15.6-16K month. There is also bare land with spots to put up storage units or charge to park campers or boats.

Estimated expenses taxes, insurance, utilities, are around $30K year and maintanance is a wildcard estimate at around $20K year. I would self manage for now with a program like turbotenant. The apartments have all been renovated a few years back with new roofs and updates so no real known maintanance problems.

Running the numbers in a rental calculator including payments made to owner, if rent was raised to $15,600 month with zero vacancies and $50K year expenses I am coming up with a $60,744 cash flow, 17% cash on cash return and 9.11 cap rate. However that does not take into account the HELOC payment which we would put around $2k a month toward so that $60,744 would be reduced by $24k down to $36,744. Of course, these numbers would of course be lower before we raised the rent and filled the vacancies. With two vacancies and the owners house not rented, and the rentals bringing in $11K, we would be at a 0 or negative cash flow by the time we subtract the HELOC payment. Technically we could pay interest only on the HELOC until we got the vacancies filled.

We own one rental property now that is paid off but this is the first type of deal of this magnitude that we have considered. What are your guys thoughts on this deal? Is the fact that the property can pay for itself and still provide a little cashflow the first year with a steady rise after that a no brainer or what are we missing?